Q1 2023 First Merchants Corporation Earnings Call
Good day and thank you for setting by walking you through the first merchants Corporation first quarter 2023 earnings at this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question answer session to ask a question. During the session you will need to press star one on your telephone.
Or an automated message at Viking ranges race to withdraw your question. Please press star one again, please be advised that today's conference is being recorded before we begin management would like to remind you that today's call contains forward looking statements with respect to the future performance and financial condition of first merchants Corporation.
That involves risks and uncertainties.
That information is contained within the press release, which we encourage you to reveal Additionally management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most direct comparable GAAP measures. The press releases to release available on the website contains financial and other quantitative.
[noise] formation to be discussed today as well as.
A reconciliation of GAAP to non-GAAP measures.
And I like to turn the conference over to your Speaker today, Mark Hardwick CEO . Please go ahead.
Good morning, and welcome to first merchants first quarter 2023 conference call Victor Thanks for the introduction and for covering the forward looking statement on page two.
We released earnings today at approximately eight a M eastern time.
You can access today's slides by following the link on the second page of our earnings release.
I'm on page three of the presentation, you'll see today as presenters and are buyers to include President, Mike Stewart, Chief Credit Officer, John Martin and Chief Financial Officer, Michele Kirby escape.
On page four you will see the geographic locations of our 121 banking centers.
Serve as a physical location were approximately 400000 customers periodically stop in <unk>.
So this is a trusted first merchants banker for advice and consultation also were a little over 20, 101st merchants employees work face to face with our colleagues to grow their careers, while attending to the financial needs of our customers and our communities.
It's worth the culture comes to life and why some of the awards at the bottom right of this page were received.
Given the turbulence of the past quarter I'm glad we have such a grassroots community banking model.
Honestly I love, our business model and I love being a community banker and since we last talked environment has provided tremendous opportunities to have thoughtful and thorough conversations with our clients.
Turning to slide five I'm pleased to report that loans.
Deposits on hand liquidity and capital are all higher better or stronger than at year end 2022.
We reported earnings per share of $1.07, an increase of 17, 6% over the first quarter of 2020 two's earnings per share total of 91 cents per share.
Net income was nearly $64 million.
Return on tangible common equity totaled $19 eight 2% and return on assets totaled 1.42% for the quarter.
Our balance sheet, including capital is strong deposits and on on hand liquidity are are higher than year end.
Loan growth continued for the quarter totaling 7.9% and loan yields continue to grow as well our efficiency ratio is at our target levels in the low fifties and our credit quality remains healthy.
No provision expense was recorded during the quarter.
We continue our focus on delivering high performance results to meet the needs of our stakeholders, including projects like our digital monitoring or is it modernization efforts, we even signed new contracts with both Q2 and assets and see and are hard at work to deliver on our timelines for deployment now.
Now, Mike Stewart will provide more insight on our balance sheet growth before Michel and John dive into the details you're all looking forward to.
Are you hearing regarding our liquidity and credit.
Yes, Thank you Mark and good morning to all.
Last two years I haven't spent any time on slides six and that's where I want to start as our strategy has not changed.
<unk> the recent turmoil in the banking industry, it's worth reminding ourselves that our results represent the durability of our business model and the markets. We serve visualize the map Margaret Mark reviewed on slide four where we primarily operate with their needs three states. It's the heart of the Midwest.
Our markets include growing metropolitan cities, like Indianapolis, Columbus, and Detroit mid sized cities like Fort Wayne Ann Arbor, Lafayette, Muncie, and monster, along with many small towns in between.
The last bullet point under the consumer banking header states, we serve diverse locations and stable rural and Metro markets.
Our granular and diverse customer base with deposits from all banking segments consumer high net worth small business large corporate government agency commercial real estate clients for.
For the first quarter of 2023. These markets have remained resilient in the face of the industry turmoil and an uncertain macroeconomic environment unemployment.
Unemployment rates remained stable the consumer remains healthy and our business customers continue to seek ways to expand and operate optimize their operations our product clients continue to trust our advice and counsel.
We remain committed to our business strategy and remain committed to our strategic direction of organic growth investing in our team investing in our digital products and platform and top tier financial metrics.
So, let's turn to page seven.
The top of the page offers a breakdown of the core loan growth by our business units.
Got it last quarter that we would expect loan growth to be in the mid single digits and for the first quarter loan growth was seven 9%.
The commercial segment growth was a blend of the commercial industrial and investment real estate sectors growing across all the markets we serve.
As John Martin will further detail our C&I business is granular with state with a stable credit profile and our investment real estate focus is not on the office sector.
I want to spend more time on the global loan results specifically the dollar increases behind the percentages on this page.
As noted on slide 10, the commercial segment represents 75% of our total loan portfolio.
The five 6% of first quarter growth is approximately $161 million or 68% of the total growth in the quarter a $238 million.
While the consumer segment contracted this quarter by four 1% the dollar amount was less than $5 million.
Our mortgage portfolio growth during the quarter was approximately $80 million versus the prior quarter mortgage growth of 105 million. My point is the commercial segment continues to be the long growth engine of the bank.
And within the commercial portfolio, we are starting to get higher spreads.
Within the investment real estate segment spreads are widening by 25% to 40 basis points on a similar risk profile from the second half of 2022.
And in the C&I space spreads are slowly widened by 25 basis points with a strong emphasis on relationship strategies like deposits and fees.
We have maintained a consistent and disciplined approach towards underwriting with all of these segments.
Martin has more detail on the loan portfolio later, but note the commercial and consumer pipelines ended the quarter at consistent levels to prior quarters.
The mortgage pipeline ended lower for the sixth consecutive quarter. Moreover, at the start of the year, we strategically adjusted our approach towards loan mix and are pivoting back to an originate and sell model with 70% of originations to be sold in the secondary market and 30% portfolio.
Overall, the outlook affirms my expectation of single digit loan growth moving forward to 2023.
And I want to speak to deposit section on the bottom half of the page.
Posit balances grew at nearly 9%.
We have been in active dialogue with all of our clients discussing the safety of their deposits the pricing options, we provide and adding first merchants context to the banking headlines.
Our commercial deposits showed less than a 1% decline.
While we onboard a new relationships through the quarter, our operating balances across the network declined as higher cost borrowings under a line of credit was a better use or they were repaid or they were using for other strategic business investment opportunities.
The average utilization rate of the commercial lines of credit and for consumer HELOC were flat to prior quarters.
As Ive discussed previously our consumer digital deposit acquisition initiatives began well over a year ago.
Over that timeframe, we've demonstrated an ability to execute as a company as we launched our new account online account origination platform.
And we continue to grow our consumer deposit balances and households throughout the quarter and the online channel accounts for nearly 30% of the new account openings.
We also launched are interested in new brand campaign to support our customer acquisition strategy through radio print digital and in branch advertising.
They can't paint demonstrates our interest in helping our customers and communities Prosper and has supported the deposit growth we experienced in the consumer segment, which was nearly 11% in the quarter.
The acquisition strategies have been supported by continued retention strategies that our personnel delever deepening the relationship with our solution based customer service enhanced online mobile and ATM feature than convenience along with our customer friendly overdraft approach. All of these efforts are positioning us to increase the number.
Of customers, we serve and drive positive and profitable deposit balance growth.
Michelle has more details to share about our balance sheet, the granularity of our deposit mix in our income statement. So I'll turn it to you Michelle Thanks, Mike.
Rents will begin on slide eight.
During the quarter, we had deposit growth of $321 million shown on line for cash flows from the sales of securities of 213 million, which is reflected in investments on line three.
Coupled with run off cash flow from the investment portfolio at 72 million, creating total liquidity of over $600 million during the quarter.
The liquidity was used to fund the loan growth that Mike just discussed in his remarks of 238 million shown on line to pay down borrowings of $160 million and retain cash in excess of 200 million, which we chose to do as a matter of prudency given the recent disruptions in the banking environment.
Our loan to deposit ratio this quarter remained relatively stable and low at 83, 3% compared to 83, 5% in the prior quarter.
Our earning asset mix continues to trend in a favorable direction and we feel our balance sheet is well positioned heading into the second quarter to support growth.
Pre tax pre provision earnings totaled $75 4 million this quarter P. T. P. P return on assets and return on assets was 167% and P. G. P. P return on equity was $14 four 8% intra.
Interest, earning asset volumes and yields were up but was offset by a lower earning day count this quarter as well as higher deposit costs, resulting in net interest income of $144 1 million shown on line 11, a decline of $4 9 million from prior quarter net.
Net income on line 17 totaled $64 1 million and our efficiency ratio remained low at 50, 172% demonstrating excellent operating leverage.
The tangible common equity ratio on line six increased 41 basis points totaling 7.75% and tangible book value per share online twenty-six increase 148%.
At one point I'm, sorry, a dollar and 48 cents or 7% to $22 93, reflecting the strong earnings from the quarter as well as a meaningful recovery in the unrealized loss valuation of the available for sale securities portfolio.
<unk> nine shows highlights of our investment portfolio.
On the top right you can see the yield on the portfolio remained relatively stable given we were really weren't reinvesting cash flows and bonds. The total portfolio balance declined approximately $200 million from last quarter due to $213 million in the sales of bonds, resulting in a modest realized loss.
It's a 1.68 million or 8%.
Those sales coupled with scheduled paydowns and maturities were off.
Offset by an improvement in the overall valuation of the portfolio of $51 million to arrive at the net decline of $200 million.
On the bottom right you can see we had a net unrealized loss on the mark to market of the available for sale securities portfolio of $245 7 million at quarter end compared to $296 7 million in Q4, which reflected a nice recovery.
We also note the unrealized loss on the held to maturity portfolio of $328 8 million, which was also improved by $51 million.
The effective duration of the portfolio was unchanged quarter over quarter remaining at six four years.
The investment portfolio as a percentage of total assets is currently around 22%. This is down from a peak of 29% at the end of 2021, demonstrating the progress of a return to a more normalized earning asset mix.
In the bottom left you will see the cash flow, we expect to receive in the remainder of 2023 of $220 million, which includes cash from principal and interest payments as well as maturities.
We will also continue to sell bonds, where we see opportunity, creating additional cash flow.
Since quarter end, we have sold approximately $69 million in bonds, taking a very minor loss of 300000. So the bond portfolio will continue to be a strong source of liquidity to fund our loan growth through the year.
Slide 10 contains highlights of our loan portfolio.
In the bottom left corner, you'll see the stated first quarter loan yield increased meaningfully up 42 basis points to 6% from last quarters yield of 558%.
On the top right I noted the yield on new and renewed loans, which also increased substantially from $6, 10% last quarter to 7.08% this quarter, an increase of 98 basis points.
We are pleased with the progress we have made in pricing and feel confident in our ability to maintain that discipline going forward.
On the bottom right you will see $8 2 billion of loans or 67% of our portfolio are variable rate with 38% of the portfolio repricing in one month and 51% repricing in three months. So we will see an increase in interest income from the loan portfolio. If the fed increases rates another 25.
At this point.
Slide 11 shows the details related to our allowance for credit losses on loans.
We did not record any provision expense during the first quarter and had net charge offs of only 225000, which brought the ending allowance for credit losses on loans to $223 1 million.
Coverage ratio trend is shown in the graph on the top left our coverage ratio at the end of Q1 is 182% down from 1.86% at the end of Q4 due to loan growth, which is ample compared to peer averages of one 2%. This reserve coupled with the remaining fair value.
Accretion of $29 million, which gives us some additional coverage for acquired loans provides a great credit protection given the uncertainty of the economic environment.
Now I will move to slide 12.
We continue to have a strong core deposit base.
Non interest bearing deposits were 20% of total deposits at the end of the quarter, which is down from the peak of 23, 6% in the second quarter of last year.
This decline is the result of runoff of stimulus dollars, but more recent activity represents the mixed shift felt across the industry as our new and existing clients move into higher yielding deposit products do.
Due to the design of our checking accounts, we pay interest on those products, which might make our percentage of noninterest bearing deposits appear lower compared to some other banks, but the interest we pay on a substantial number of those balances is very low I noted in the highlights that 47% of our total deposit balances earn only.
Five basis points or less.
These balances declined 23, 2% quarter over quarter. These.
These accounts, mostly represent accounts, where customers utilized direct deposit or electronic payment services and are operating in nature, and therefore less yield sensitive.
Our total cost of deposits increased 49 basis points to 1.41% this quarter, reflecting the competitive pricing environment, our interest bearing deposit cycle to date beta at quarter end was 37%, which was up from 29% last year note that our deposit.
Betas do include time deposits.
The skull disclose the total deposit costs for March which were one 6% demonstrating the ongoing upward pricing pressure we're experiencing.
Slide 13 includes some additional disclosures we added this quarter about our deposit base and funding sources.
Our deposit base remains very granular with the average deposit account totally and only $35000 and having great diversification by commercial industry has as demonstrated in the top left graph, where we have disclosed the top 10 makes categories.
FDIC insured deposits totaled 57, 2% of total deposits. In addition, the state of Indiana has a public deposit insurance fund that insures public deposits, providing insurance to an additional 14, 8% of our deposit base. Therefore, only 28, 1% of deposit.
Our uninsured and we have ample liquidity to cover those deposits as is disclosed in the bottom right.
Overall, we feel these disclosures illustrate the attractiveness of the granular diverse deposit franchise, we enjoy and our strong liquidity position.
Slide 14 shows the trending of our net interest margin.
Line, one shows net interest income on a fully tax equivalent basis of $150 4 million. When you back out noncore interest income items, such as fair value accretion online to our core net interest income totaled 148 million, which is shown on line for this.
This is an increase of $42 9 million over the first quarter of 2022, and a decline of just $4 5 million compared to prior quarters.
Stated net interest margin on line seven totaled $3 five 8% for the quarter.
Adjusting for fair value accretion brings us to core net interest margin of 352%, which is shown on line 10, an increase of 55 basis points over the first quarter of 2022, and a decline of 13 basis points from last quarters core NIM of $3 65.
The lower day count in the quarter caused a five basis point decline on a linked quarter basis, leaving an operating decline of just eight basis points.
On slide 15.
Noninterest income came in as expected and totaled 25 million for the quarter, which increased <unk> 9 million on a linked quarter basis customer.
Customer related fees this quarter totaled $24 5 million, increasing $2 6 million from the prior quarter.
The increase was driven by higher card payment fees as well as higher client interest rate loan level hedging activity offsetting this customer related income we recognized a $1 $6 million loss on the sale of 213 million of available for sale Securities as I mentioned earlier.
Moving to slide 16.
<unk> expenses for the quarter totaled $93 7 million salaries and benefits expense increased $5 1 million $1 3 million of that increase was due to annual benefit plan expenses incurred in Q1, and the remainder was due to merit increases in incentives.
FDIC assessment costs increased as a result of the two basis point increase but were offset with one time FDIC credits of $2 million recorded in Q1, resulting in a quarter over quarter decrease of 900000.
We also experienced reduced marketing costs of $1 8 million over last quarter and other expenses increased significantly because we recorded 700000 of gains on the sales of property in Q4, which didn't recur.
Our loan low core efficiency ratio reflected in the top right shows that we continue to achieve strong operating leverage even while we invest in technology and talent to grow the business.
Yeah.
Slide 17 shows our capital ratios.
Our earnings growth this quarter drove capital expansion in all ratios.
The comments on the highlights draw attention to the impact of investment security marks on capital ratios.
You will see the tangible common equity ratio is 636%, including the held to maturity marks and the common equity tier one ratio is 961% after incorporating the unrealized loss on available for sale securities reflected in accumulated other comprehensive income reflecting.
Great capital strength. It is important to note that all regulatory capital ratios remain well capitalized after incorporating the available for sale and held to maturity investment marks.
Overall, we are pleased with the balance sheet strength and resiliency of our business is reflected in these Q1 results that concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.
Yeah.
Alright, Thanks, Michelle and good morning, My remarks start on slide 18, where I highlight the loan portfolio, including segmentation growth and composition I'll comment on the expanded portfolio insights slides review asset quality and finish up with the nonperforming asset roll forward.
On Slide 18, we grew total loans by $161 million total commercial loans by $161 million on line eight with increases in regional and middle market C&I as shown on line. One is stronger C&I sponsor finance growth online to these came after a strong fourth quarter.
Regional and middle market C&I and.
Decline in C&I sponsor finance balances dropped.
Dropping two lines for.
We had construction growth of $125 million, while utilization increased from 61, 8% to 63.2% from the linked quarter and up from 54% at the end of the first quarter of 2022. This increase in construction was partially offset by payoffs.
And the investment CRE, our investment CRE of roughly $30 million on line five we continue to hold our underwriting standards.
As we discussed in previous calls, which is driving more equity in the projects to make them work and as Stu mentioned earlier, we are beginning to see wider loan spreads.
Moving down to line nine we maintained roughly the same pace of growth in the residential mortgage portfolio in the first quarter. While we are currently in the process of adjusting rates to drive higher originate and sell levels moving forward.
Prior to the move in rates and.
In 2022, we had historically had a sold too.
To portfolio ratio of roughly 70% to 30% over the last year that proportion flip to 30%, 70% portfolio to solve and we are in the process of adjusting pricing on Newport, new pipeline to return to more historical levels.
Turning to slide 19.
I've updated the portfolio in slight insight slide where we slice the portfolio several different ways to provide additional transparency into its composition in the commercial space. The CNI classification includes sponsor finance as well as owner occupied CRE associated with the <unk>.
This.
Our C&I portfolio is representative of our markets and has a 19.1% concentration in manufacturing are.
Current line utilization remained consistent at 41, 6% up from roughly 41% at the.
At year end with line commitments, increasing a $126 million.
We participate in roughly $780 million of shared national credits across various industries with an average balance of roughly $11 million. These are general relationships, where we have taken a position and there is access to management and revenue opportunities beyond the crab credit exposure.
We also have roughly $67 million of SBA guaranteed loans.
Diving into the sponsor finance.
Diving into sponsor finance borrowers.
In this portfolio are platform companies owned by private equity firms with an eventual expectation of sale. We review the individual relationships quarterly for changes in performance, including leverage cash flow coverage and borrower condition are presented some of the key underwriting metrics, including cash flow leverage and fixed charge coverage.
Classified loans improved ending the quarter at three 5% down from four 2% the prior quarter.
Moving to construction finance, we have limited exposure to residential development and we are primarily focused on the one to four family non tracked individually build residential construction loans through our mortgage department.
For our commercial construction, we continue to have a bias towards multifamily construction.
Moving down to consumer residential mortgage the portfolio consists of primarily prime originated residential and consumer loans.
This includes HELOC and he loans and to a much lesser extent, France originated auto secured loans and miscellaneous other consumer loans.
In summary, the portfolio has a balanced mix of what one might expect from a Midwest bank.
Turning to slide 20.
<unk> added this slide to give further detail into our non owner occupied commercial real estate portfolio.
The breakout is sorted based on our level of exposure from left to right.
Since the great recession, we have focused on multifamily CRE lending, while selectively adding project at other other segments Officer office exposure is broke it out below the chart and represents two 1% of total loans with the highest concentration outside of general office and medical.
From a historical standpoint, the portfolio the portfolio has performed well much like the rest of the portfolio. The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office exposures in view of the exposure is being mitigated a acceptable given our current market.
<unk>.
Turning to slide 21 as in prior quarters. This slide highlights our asset quality trends and current position, we continue to maintain our asset quality profile with nonperforming loans on line six at 50 basis points of loans up from 42 basis points. The prior quarter, we had an increase of 90 days past due as a.
<unk> of two unrelated loans, where the resolution occurred after quarter end the first related to the settlement of a participation, which increase the category $4.5 million and a second from the renewal of a $1 $6 million loan bulk have since been resolved.
Moving down to line seven classified loans or loans with a well defined weakness increased $35 million to $255 million or 2.04% of total loans, which continues to remain comparable to pre pandemic levels.
And finishing out this slide we had net charge offs of $200000 for the quarter, resulting in another.
Quarter of strong portfolio performance.
Then moving on to slide 22, we once again rolled forward the migration of nonperforming loans charge offs or re in 90 days past due for the quarter non accrual loans went up by $4 $3 million on line six resulting from new non accruals of $15 $4 million online to a reduction from pay.
Our changes in accrual status of $8 $6 million on line three.
And a reduction of $1.4 million of loans moving to or read with gross charge offs of $1 $1 million.
Dropping down to a lot of light 11, 90 days past due increased $5 $3 million as a result of the issues just mentioned related to the $6 $1 million in 90 days past due.
On the last slide so net net 90 day N P A's plus.
Net net NPA is 90 days past due were up $10 $7 million, leaving us with favorable credit metrics overall borrower borrowers continue to perform well despite labor challenges material shortage and higher interest rates.
Mark I'll turn the call back over to you.
Thanks, John Michel and Mike.
Hey, I hope the level of detail provided.
It demonstrates our desire to just create transparency into our business and I hope it's helpful to our current and our future investors.
Slide 23, and 24 are.
Provided just to share.
The highlights of our tenure.
Annual growth rates.
And for both assets and total returns.
And then if you look at slide 25, it's just it's a reminder of our vision mission and our team statements.
In the strategic imperatives that guide our decision making.
I would point out given the environment, we're in bolt point for that where we're very much focused on maintaining top quartile financial results supported by industry, leading governance risk and compliance practices to ensure long term sustainability of the enterprise so.
We really appreciate your attention.
And we're happy to take questions at this time Victor.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, we compile the Q&A roster.
One moment for our first question.
And our first question will come from the line of Brian Martin from Janney. Your line is open.
Hey, good morning, guys.
Good morning, Brian .
Wanted to I appreciate the color on the all the disclosures on the commercial real estate and the construction and different office portfolios.
One question John just on I think he would tell you show the classified loans out there. This quarter can you just talk about any changes you've seen in the criticized loans.
Maybe you didn't have data on just trying to understand if you're seeing any changes underneath what that what we're seeing within the press release. It sounds like credit is really performing well. So just kind of wanted to confirm that.
Yeah.
Hi, Brian .
The.
Substandard loans moved at a similar or excuse me the criticized loans moved at a similar rate to the substandard loans.
<unk> was pretty even within the portfolio Chris.
Criticized loans, obviously with a potential weakness or a higher proportion of the total so it's a larger dollar amount, but the rate at which it moves is about the same.
Okay, so pretty pretty close and then.
Maybe just jumping to the just two other things just on the expense.
And just kind of the the increase this quarter was kind of the normal seasonality and just wondering if I don't know if Michel if you can give any color on just kind of what the what the base rate going forward as I know you talked about the FDIC I, maybe it kind of like it sounds like a one time event, but just kind of getting.
The right place for you know think about expenses going forward.
Yes sure.
So I would look at our expense run rate to run about 95% to $96 million on a quarterly basis through the rest of the year. We did have that one time credit. But then we also kind of offsetting that we had some employee benefit expense that incurs in January I'm, sorry in Q1, each year, so that will not recur in the later quarters.
And then there was also some incentive cost in there as well.
Little more seasonal but so I would look for 95% 96 as a normal run rate Brian Gotcha. Okay. And then just maybe one other one and I'll jump out and jump back in the queue. Just see the margin can you just talk about what was the margin in the month of March relative to kind of what it was for the quarter and just kind of trying to understand the baseline of what we started at.
Adding into too acute here.
Sure give me one second here so in March our margin was $3 55.
It could be five okay perfect.
All I had for now let me step out and I'll, let someone else.
Yes.
Okay. Thank you.
Thanks.
Yeah.
One moment for our next question.
Okay.
Our next question will come from the line of Damon Delmonte from <unk>. Your line is open.
Hey, good morning, everyone I hope everybody is doing well today and thanks for taking my questions.
I guess just kind of continue on the margin discussion there Michele.
You know as you look at like your deposit betas over the upcoming quarters, and if we kind of call. The end of the cycle being at the end of this year.
Do you kind of see that tracking based on where you are today.
Yeah.
We've modeled out Theres no theres. So many assumptions that go into figuring out what your margin is and I think after we kind of thought through what we think could play out through the remainder of the year, we're assuming that our Q4 margin would be 3.43%.
Which is still 40 basis points above Q1 of 2022 and so.
We're expecting maybe another decline of maybe 15 basis points through the remainder of the year.
Okay. That's helpful. Thank you.
And then with respect to fee income.
Strong quarter this quarter.
What are some of the puts and takes we should consider as we look at the remainder of the year.
I think this quarter's fee income level is a really good run rate for the remainder of the year.
We do plan to sell more mortgage loans than we have in the last few quarters until we do think that could generate some gains and so that's really kind of what is generating our confidence and stability.
Okay, Great and then I guess lastly.
Your approach to kind of dealing with the loan loss reserve has been to grow into it.
Over the last couple of years here.
Do you feel like Youre getting to a point, where you need to start to start providing for the growth that youre expecting or do you think that there is still more room to grow into that.
And I think theres more room to grow into it.
We don't expect to have to take provision in the near term we are modeling a mild recession in our models currently but we'll continue to evaluate it each quarter with loan growth and particularly if we see any credit events that occur during the year.
Okay, Great. That's all that I had thank you very much.
Thanks Damon.
One moment our next question.
Okay.
Our next question comes from the line of Scott <unk> from Piper Sandler Your line is open good.
Good morning, everyone. Thank you for taking the question.
So I was just curious just given all the sort of the heightened.
Visibility or certainty on securities portfolios generally any any thoughts on.
Whether you guys would manage any of the securities portfolio, even differently just given.
All of the unrealized loss issues, both in <unk> and and held to maturity as well.
I don't think there'll be anything different in the way that we'll manage it one of the things that I mentioned.
This quarter, we were able to get $213 million in bond sales in Q1, we've had $69 million in Q2, I think we'll continue to look for opportunities to try to.
Harvest some of those bonds and.
The loss that we've taken is pretty negligible.
So we think that that will continue through the remainder of the year and then I'll provide some some good liquidity for us and we'll get back to a more normalized level of investments to assets.
Okay, Perfect and then wanted to switch gears to the deposit base for just a second I think just on noninterest bearing to total year at about 20% and then I.
I appreciated the discussion of sort of those lower yielding.
Kind of operational accounts that you have as well so in response to what I'm going to ask if you want to layer those in that that would be certainly fine as well, but how do you think the deposit mix, particularly year noninterest bearing or low yielding.
Low interest cost balances will sort of traject within the scheme of the total deposit portfolio through the rest of this cycle.
I think we're still we're going to continue to see a little bit more of a negative mix shift and so if we just stick with just the pure noninterest bearing since I know, we do put that in our press release.
On the.
The noninterest bearing is currently at 20% of total deposits and so I would expect that that would probably come down maybe another two basis points, maybe through the remainder of the year.
Two two percentage points or a basis, 0.2%, yes, sorry.
Okay perfect. That's good color. Thank you very much.
Yeah.
Our next question.
Okay.
Our next question comes from the line of Ben Garlinger from Hovde Group. Your line is open.
Hey, good morning, guys. It seems like you guys are still in a market share.
Expansion kind of in growth mode still.
Any opportunities or any lending segments.
People are stepping away from or kind of more broadly speaking are you are you seeing shots on goal now because of a bigger size.
And we're pricing is kind of more on the banks favor grocers theres less competition.
Well this is Mike Stewart here, yes, as our bank has grown we have invested in a group of people that I would say focus on what we call upper middle market the broader market might just call. It in the middle market, but we have the ability to work with larger companies and therefore control.
Their entire operational accounts at the same time.
And then our expansion into the greater Detroit marketplace from Michigan in particular over the last year that gives us opportunity in that space as well so I do think that.
The organic growth on the commercial side in the middle market space.
It's a good place for us to be and Thats, where were seeing most of our growth.
Yeah.
Got it.
Sure.
That's kind of a two part question here.
Because I mean deposits were pretty solid the growth was was there anything within that.
It's purely a seasonality factor that.
Hello.
Kind of boosting.
One key results.
No we don't really have much seasonality in our deposits I mean, the only seasonality that we incur is intra quarter with public funds, where we see taxes come in and that occurs typically in may and in November but then by the time, we get to the end of a reporting quarter. It kind of flows back out and so when you look at quarter end.
There's really nothing there I think to note then.
Gotcha, Okay. That's first thing, but when you just think kind of your deposit growth was pretty healthy relative to what we've seen in the industry. So I'm just kind of.
Maybe I'm thinking out loud here, but it seems like you might be pulling forward some of your deposit.
The pressure and if loan growth doesn't materialize I think you're is it safe to assume your margin could actually be higher than where you were you stated for Q or is that kind of really embedding a mosaic of theories.
So pretty comfortable with your core to your guidance.
Yes, Ben.
It's a great point.
We were.
We became much more aggressive as Mike Stewart mentioned in early February .
In March with deposit specials on the consumer side and individual conversations on the commercial side.
Michelle's guidance.
We feel good about in terms of overall margin.
Where it takes deposit betas.
And just given the environment feel like.
Putting a having a conservative estimate makes sense.
And given all the uncertainty so we.
We feel good about where we stand in.
We're optimistic about the remainder of the year and our ability to continue to grow and funding is critical to growth. So.
We definitely kind of shifting gears in early February and sort of being more aggressive with deposit rates.
Gotcha I appreciate the color on the extra insight on the slide deck I appreciate it. Thanks.
Thanks, guys.
Thank you.
Thank you.
For next question.
Our next question comes from the line of Terry Mcevoy from Stephens. Your line is open.
Hi, good morning, everyone.
Good morning, Terry.
Maybe mark start with a question for you kind of a non modeling question. When I look at slide 24, first merchants has had kind of steady organic.
Bank acquisition growth over the years. So I guess my question is if bank M&A is on hold for a while how are you thinking about accelerating organic growth or their hiring plans plans youre contemplating any any new markets that you think can provide some incremental growth I think a few calls ago, you mentioned expanding into Cincinnati.
If my memory is correct, but if you have any comments there that'd be helpful.
No.
<unk>.
Mid to high single digits over time of organic growth, we still feel great about.
In this environment, we think.
A little lower estimate maybe five or six 7% it makes more sense, but.
That's what we're focused on for now the M&A activity. We have there are a handful of markets we like.
We're focused on deposit rich institutions, but don't anticipate really doing anything until at least 2024.
You know I feel like we can produce the same type of results.
Just on a core basis for a given period of time.
Ultimately, we tend to like M&A for a couple of reasons.
So that it provides additional funding to support continued loan growth.
And introduces new markets, where we can build a commercial bank and typically results in improved efficiencies and economies of scale, our operating leverage over time, but.
Okay.
We're looking in.
Four states that we're currently in Indiana, Ohio, Michigan.
Maybe Illinois, but focus on the other three primarily.
In this environment, we're just spending time continuing to build relationships versus really thinking about kind of putting a price out on the table. We also and I mentioned those two.
<unk> that we signed this year with Q2 and S S and CE to replace our online and mobile platform as well as our private wealth platform.
And we're very focused on completing those projects and getting all of that work done by.
By the end of the second quarter of next year or so.
It's all internal at this point.
We'd expect it to stay that way at least in the 'twenty four.
Yes.
Thanks for that Mark and maybe a follow up for John .
The shared national credit portfolio of the 782.
Are there any leverage loans in there and maybe give us a profile what's in that portfolio in terms of.
Who are the lead banks and.
And some kind of concentration or geographic color would be helpful as well.
Yes, so the.
Kind of fits into to get in there.
Categories, Terry with the preponderance of the loans being middle market companies that we participate with partners and our geographic footprint. It's that statement I made earlier about having access to management and cross selling into other.
Non credit related services to two of those companies. There is a small less said and I think it's around $100 million of.
I'll call it leveraged loans cred.
Credit rated triple b or better triple b minus or better.
And.
Those are.
More national companies, but it's it's a it's a small portion a portion of those were picked up through some of the mergers that we've completed hey, Terry and Mike Stewart. The typical banks that we partner with would be the names like Huntington and key in fifth third.
That are leading transaction than on a market and we're partnering there because remember we also have a full syndication desk and capabilities. So it offsets what we're also selling to diversify portfolios on the other end in those very banks also bind our transactions as well as selling downstream.
<unk>.
Perfect.
The color guys and Michelle from you as well thank you.
Okay.
Thank you Derek.
Thank you and that concludes our Q&A session for today.
I'd like to turn the conference back to Mark for any closing remarks.
Yes, just again, thanks for your interest and your investment in first merchants and <unk>.
I hope all of the color. We've tried to provide it helps you have great insight into our operating model and hopefully you can also tell from the.
Comments that we're optimistic about the future of first merchants and our performance. So thank you.
Yes.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Yes.
Okay.
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Yeah.
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Okay.